What happened

Shares of Casey's General Stores (CASY 0.78%) took a spill Tuesday after the convenience-store operator posted disappointing results in its second-quarter earnings report. Casey' missed bottom-line estimates as growth in the key prepared-food segment was not as strong as management had projected.

As a result, the stock closed down 11.6%.

A Casey's store with a tanker truck to the right of it.

Image source: Casey's General Stores.

So what

Casey's said that total revenue increased 12.1% in the quarter to $2.15 billion, beating estimates at $2.13 billion as the company opened its 2,000th store in the period. However, gross margin fell 140 basis points to 21.7%, leading to earnings per share declining from $1.44 to $1.28. That figure was below analyst expectations at $1.38.

While a majority of the Midwestern chain's revenue comes from fuel, prepared food such as its famous homemade pizzas, is how the company differentiates itself from the competition, and is also its highest-margin category. Unfortunately, comparable sales growth in prepared foods slowed to just 2.1%, considerably below the company's own guidance at 4% to 6% as CEO Terry Handley noted a slowdown in traffic in the second half of the quarter. Margins in the segment also fell from 62.9% a year ago to just 61.3%, missing guidance at 61.5% to 62.5%.

Now what

Handley underscored the investments the company was making to prepare for the future, saying, "We continue to make investments to enhance ongoing operations and support our long-term vision to create shareholder value." The company now has 200 new stores in the works and is focused on digital engagement and price optimization. 

However, investors were unwilling to forgive it for the weakness in prepared foods, and the company's guidance signaled that those problems would continue. Casey's called for comparable sales in prepared food to grow 2% to 4%, down from a prior range of 4% to 6%. If margins continue falling in that category as well, Casey's will struggle to grow profits despite its expansion.